It’s hard to find a more cynical place than the financial
markets. Every time there is a catastrophe somewhere in the world, investors
rush to look for opportunities to make money.
This was the case after the 9/11 attacks in the United
States, the Fukushima catastrophe, the Arab Spring, and, of course, the wars
between Ukraine and Russia, as well as between Israel and Hamas.
The beneficiaries varied in each case. For example, when hurricane
season hits the United States, analysts often point to companies
such as The Home Depot, Walmart, or generator supplier Generac.
Should we judge investors and analysts by their lack of
empathy?
The famous saying is, “Judge not, lest ye be judged.”
Markets exist to react to all sorts of events, so it’s hard
to fault investors for doing what they’re there to do. Instead, let’s join the
majority and discuss who will gain from the worsening geopolitical situation.
Naturally, the defense sector is at the forefront of our
minds.
When tensions rise, so do arms orders. It’s no wonder
companies like RTX Corporation, Lockheed Martin, and Northrop Grumman have outperformed the S&P 500 over
the past two years.
However, they are not the only ones benefiting from global
instability. The cybersecurity sector is also a major player, as modern
conflicts are increasingly played out in the digital realm.
If we broaden the view, increased demand for weapons could
also benefit metal suppliers and even chip manufacturers for military
equipment. Overall, there are many opportunities.
However, there are better strategies than buying stocks
just because a company belongs to the right sector. Approaching it with due
diligence is essential so you don’t waste money.
For example, research whether the company has had public
contracts in the past, how large they were, and whether it can expand
production if it gets a larger order.
If the answers to these questions are encouraging, you are
on the right track. The next step is to assess the company’s attractiveness
based on the valuation parameters.
If you’re still unsure about stocks, there’s always a
tried-and-true option – invest in safe assets that tend to increase in value
during times of instability. We’re primarily talking about precious metals –
silver and gold prices often perform well during
geopolitical crises.
What else should investors keep in mind?
In addition to monitoring announcements about possible new military
spending, it is crucial to monitor the general economic situation,
as unexpected developments can affect investments.
For example, this Monday, Rheinmetall shares fell on news
that the German government had decided to cut financial aid to Ukraine due to
budgetary constraints. Overall, it’s wise to remain cautious.
